Vollgeld as Voldemort: Is the Swiss Villain Coming for American Banking?

On Sunday, June 10, Swiss voters resoundingly rejected “Vollgeld” – a sovereign-money referendum that would have made the Swiss National Bank an all-powerful arbiter of money and credit. Defeat notwithstanding, Vollgeld is just a test run. In this blog post, we consider Vollgeld’s impact with particular attention to the U.S. Any doubts that its impact could be significant is dispelled by a brand-new paper laying out a U.S. Vollgeld from a think tank with ties to Sen. Warren – a national leader of progressive Democrats with considerable power to influence thinking, if not, for now, actual legislation.

What is Vollgeld?

The Swiss referendum has often been called an effort to end fractional banking. In fact, the two ideas are very different: Vollgeld is sovereign money that usurps private-bank money supply while narrow banking ends fractional finance in favor of dollar-for-dollar financial intermediation. Notably, the new U.S. paper recognizes these differences. It thus positions its version of Vollgeld as superior not only to narrow banking, but also even to the postal banking Warren has previously espoused.

Although rejected by voters, “sovereign money” is at least theoretically suited to countries such as Switzerland with long histories of powerful central banks with broad authority to intervene in the national financial market. Under Vollgeld, banks would no longer be allowed to accept short-term deposits, which would instead go into the Swiss National Bank (i.e., the central bank or SNB). Private banks could obtain funds from the SNB to make loans, as well as fund themselves with long-term deposits and capital-market instruments.

As a result, Swiss banks under Vollgeld could have stayed as levered as current rules allow or even come under more lenient ones; the trick to sovereign money is that the SNB determines how many loans are made with retail deposits, sharply curtailing private credit as the central bank makes loans to advance national macroeconomic interests and banks do the best they can with the non-deposit funding they can find. Hypothetically, the SNB would pull back its lending and keep deposits out of the banking system when it wanted to tighten monetary policy. Whether it could in fact do so or if, even if it did, whether this then affected national growth and inflation as the SNB hoped is at best uncertain.

Could the U.S. Go Vollgeld?

Any scheme that entrusts capital formation to the Federal Reserve is dead on arrival with Republicans other than the small number still clinging to old-school monetarism. That a group formed by former staffers to Sen. Warren would endorse it is, though, a loud, clear early warning that progressives may put aside their antipathy to the Fed to create a deposit-taking construct that bypasses the private banks that progressives dislike even more than they distrust the Fed.

The U.S. version of Vollgeld interestingly comes from authors with ties to the Obama Treasury. It has the Fed taking deposits from households and businesses large and small, going beyond the macroeconomic-stability objective powering Vollgeld to focus also – indeed almost exclusively – on economic equality and on curtailing the largest banks. Because the U.S. has no tradition of “helicopter” money the SNB has long provided, the plan opposes Fed use of its newfound deposits to make loans. The USPS might become an active arm of the Fed to handle the retail end of deposit-taking, with the paper opposing USPS lending in sharp contrast to legislation recently introduced by another likely Democratic candidate for President in 2020.

Clearly, the more the Fed pays deposits without lending out the money, the more these FedAccounts would cost the taxpayer. To solve for this, the paper argues that the Fed would make money from deposit-gathering by virtue of the seigniorage earned from holding Treasury obligations and lending a lot of the deposits back into the banking system through the discount window. To make this particularly attractive for small banks, they could even get Fed money at preferred rates to lend out in the broader economy.

But, even if one accepts that the Fed should take over from banks for most deposit-taking and that financial intermediation will nonetheless proceed apace, there are a lot of flaws in the plan. First, it assumes that huge Fed holdings of high-quality assets will enhance economic equality in concert with low-cost, easy-access deposit taking. Whatever the merits of the deposit construct, a huge Fed portfolio has proven to be directly unequalizing. Further, it creates all sorts of systemic risks, especially if offered in concert with ultra-low rates.

Still, the think tank’s plan is akin to Vollgeld in that it believes money creation is a sovereign function best fulfilled by a central bank, not the private sector. This could prove popular in progressive circles. Further, the paper hits political hot buttons – interest on excess reserves, interchange fees, overdraft charges, and financial literacy just to name a few. Thus, for all the profound distrust most Americans have of the central bank, the idea could gain progressive momentum depending on what the CFPB does or – more likely – doesn’t do on issues such as overdraft fees. Controversial announcements from large banks (e.g., new fees on low-balance accounts), or policy actions on other targets of Democratic ire could also fire up Vollgeld-US. The shape of the 2018 midterm and the political field thereafter could also see sovereign money gain new adherents much as the silver standard did at the turn of the 20th century when progressive Democrats railed against Wall Street. Sovereign money seen as a charge only against Wall Street could prove politically popular, at least in progressive circles, especially when proposals floated by other candidates to guarantee national income or jobs are better understood. That so popular a progressive as Sen. Warren is so close to those pushing this version of Vollgeld speaks volumes.